Trends Report – Investment activity into our space

As anticipated, this year has brought no shortage of investment activity into our space. Just last week, for example CGI Holding Corp – not to be confused with the famous dot com bomb CMGI – d/b/a Think Partnership (AMEX: THX) announced its intent to acquire the six man group of PrimaryAds. Think Partnership has been actively purchasing companies operating in the online advertising space, such as online dating site Cherish.com and technology firm Kowabunga, who is best known for their MyAffiliateProgram and Kolimbo affiliate network based on users of MyAffiliateProgram. This week’s Trends takes a closer look at Think Partnerships pending acquisition of PrimaryAds, addresses some of the rumblings to be heard surrounding the deal, and pieces together the new face of Think Partnership.

The press release discloses; “Think Partnership intends to acquire all of the stock of PrimaryAds in exchange for $10 million in cash. The shareholders of PrimaryAds can also earn up to $3 million in additional cash and up to $13 million of common stock of (Think Partnership), contingent upon the aggregate pre-tax income of PrimaryAds during the first twelve full calendar quarters following the closing of the merger achieving levels ranging from $6.5 million to $20 million. (Think Partnership) also plans to issue to stockholders and employees of PrimaryAds options to purchase an undisclosed number of shares of common stock of (Think Partnership).” Most importantly one could argue the merger is expected to be immediately accretive to the earnings of Think. As Gerard M. Jacobs, the Think Partnership’s CEO, states, “We expect that, at its current run rate, PrimaryAds will add $4 million or more to our annual pre-tax income, and therefore we expect that the shareholders of PrimaryAds will earn most if not all of the $16 million earnout portion of the merger consideration."

The question on many peoples’ minds though was, “Why PrimaryAds?” Started in November 2003, they are not only new but lack many assets assumed to be behind most acquisitions and investments in our space. PrimaryAds owns no inventory of their own, has no exclusive advertisers, nor do they have any proprietary technology. The case could easily be made that they are nothing more than brokers, offering very little of the all-important value-add. If that is the case, why would a public company use up much of its free cash to buy something so tenuous? At risk of oversimplification, the answer is money. PrimaryAds has an efficient, profitable business that has exceeded market growth, and barring no industry-wide changes, will continue to outperform.

 As mentioned above, in the eyes of many in the space, the PrimaryAds deal seems questionable given their lack of ownership on the inventory, advertiser, and technology fronts. What’s more is that some have asserted PrimaryAds revenues rely on relationships with companies operating in the contentious adware space, such as 180Solutions, a statement implying that PrimaryAds’ business is both non-substantiated and non-sustainable. A behind the scenes peak into their operations would show otherwise. PrimaryAds did work with 180Solutions but terminated its relationship at the same time that Commission Junction terminated theirs with 180 Solutions. As former webmasters and affiliates, the founders of PrimaryAds place the greatest importance on the affiliate relationships both in quality of publisher and in quality of service provided. PrimaryAds focuses on doing the right thing and has earned praise from all who work with them. Given that, along with the due diligence Think no doubt performed, the choice of PrimaryAds makes sense, including additional reasons discussed below.

Through this deal and other recent deals, Think Partnership has rather quietly begun to build a well-rounded business in the online advertising space. Their core subsidiary prior to the recent mergers and acquisitions was a self-described leader in search engine optimization and pay-per-click campaign management. With the acquisition of PrimaryAds though, they expand into the lucrative world of affiliate marketing and have acquired a company that offers many cross subsidiary synergies. For example, PrimaryAds offers a new client base for the aforementioned search engine optimization arm. The deal also gives Think a distribution outlet for its online dating site Cherish and a potential exclusive advertiser for PrimaryAds. Closing the loop, Think’s purchase of Kowabunga answers the lack of proprietary technology argument often mentioned in the PrimaryAds purchase. It also gives Think and PrimaryAds a backup in case either decides not to use the current DirectTrack platform. And, as mentioned above, PrimaryAds grows Think’s bottom line… substantially. That is why sometimes a purchase can be “about the money, stupid.” In this case though, the purchase is about more than money. It is about a diversified business and both companies deserve credit.

In its own way, the PrimaryAds acquisition is more exciting than recent funding received by perennial favorite AzoogleAds or even the mammoth acquisition of Advertising.com by AOL. The reason for the excitement is that it paves the way for other successful businesses who are just that… successful. Unlike the dot com era where valuation was based on technology alone or a perceived good idea to “leverage the power of the internet,” this deal sends the signal that our space has started to mature and operate closer to the real world where bottom line growth through acquisition is not only acceptable but an often followed strategy. This deal gives justification to all those companies who chose to operate as companies and not as dreams and suggests their hard work will pay off even further. And now that companies, in this case an ad network, without proprietary technology or other traditional assets are not only a viable business but are worthy of capital activity. The question now is, who will be next in the consolidation game? As this trend happens it will unfortunately mean few options for publishers. Yet consolidation also tends to breed new options in related areas. This is exactly what we see happening in the contextual side of the ad network space and the focus of this week’s Digital Thoughts.